We believe the latest price correction for CAO presents a buying opportunity for those who missed the last boat as industry numbers look positive with China’s 1H16 international flight passengers increasing 27% and 2H16 travel bookings growth.

Shanghai International Airport July data also look affirmative and we are confident of a stellar 3Q16 in view of the Jul-Aug 16 summer holidays.

Maintain BUY and target price of S$1.90.

WHAT’S NEW

Healthy correction presents buying opportunity.

China Aviation Oil Singapore Corp (CAO) experienced a bout of profit-taking recently which presents buying opportunities for those who missed the last boat.

We checked its fundamentals with multiple channels which showed that nothing much has changed. The latest growth figures support our confidence in the stock.

1H16 international flight passenger volume increased 27% yoy.

According to the Civil Aviation Administration of China (CAAC), China's civil aviation industry realised a total turnover volume of 45.59b tonne-km in 1H16, up 12.5% yoy with 232.3m passengers transported (+10.8% yoy). The number of passengers travelling on international flights increased 27% yoy compared with 9.1% for domestic flights.

Affirmative July data from Shanghai International Airport.

For its SPIA associate, data from Shanghai International Airport indicates that July data was also affirmative with overall plane movement growing 9.72% yoy.

International plane movements, in particular, grew faster at a 19.46% yoy growth rate. This is in line with our expectations of a trend where international flights grow faster than domestic flights in China.

STOCK IMPACT

Confident of a stellar 3Q16.

Assuming no major changes in oil prices, we are confident of CAO delivering a stellar set of 3Q16 results.

General July growth numbers for the industry look positive and we believe it will only get better with the July and August summer holidays.

VALUATION/RECOMMENDATION

Maintain BUY and target price of S$1.90, based on 14.4x 2017F PE, pegged at a 20% discount to peers’ average PE of 18x.

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